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Market efficiency of Brazilian exchange rate: Evidence from variance ratio statistics and technical trading rules

  • Tabak, Benjamin M.
  • Lima, Eduardo J.A.

This study utilizes the variance ratio test to examine the behavior of Brazilian exchange rate. We show that adjustments for multiple tests and a bootstrap methodology must be employed in order to avoid size distortions. We propose a block bootstrap scheme and show that it has much nicer properties than the traditional Chow-Denning [Chow, K.V., Denning, K.C., 1993. A simple multiple variance ratio test. Journal of Econometrics 58 (3), 385-401] multiple variance ratio tests. Overall, the method proposed in the paper provides evidence refuting the random walk behavior for the Brazilian exchange rate for long investment horizon, but consistent with the random walk hypothesis for short-run horizon. Additionally, we also test for the predictive power of variable moving average (VMA) and trading range break (TRB) technical rules and find evidence of forecasting ability for these rules. Nonetheless, the excess return that can be obtained from such rules is not significant, suggesting that such predictability is not economically significant.

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Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 194 (2009)
Issue (Month): 3 (May)
Pages: 814-820

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Handle: RePEc:eee:ejores:v:194:y:2009:i:3:p:814-820
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